Is Canada awash in savings? Does all debt represent someone else’s asset?

Note to my readers:

A trusted and very knowledgeable reader has pointed out some potentially significant (and inadvertent) misrepresentation of data contained in this post.  Alas, I am human, and this blog represents my thoughts and insights into the current economic situation.  None of us has a crystal ball or a perfect assimilation of knowledge, self certainly included.  For the sake of maintaining the integrity of this blog and not perpetuating potentially misleading information, I will remove this post for the time being until I am fully confident that the data and assertions accurately reflect reality.



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17 Responses to Is Canada awash in savings? Does all debt represent someone else’s asset?

  1. jesse says:

    Always good to “follow the money” to find out what’s going on. So how much foreign investment in Canadian debt instruments is held outside the country? It wasn’t clear in the post.

    The other way to think about the money system it is simply that assets equal liabilities. Even under FRB that’s a basic accounting truth and helps me (at least) weed through the morass of conspiracy theories floating around.

    My favourite statement I hear from time to time is “money sitting on the sidelines”. If I ever looked into what my “sidelines” money was doing I’d probably throw up a little in my mouth!

    • Hi Jesse

      The point of the post was not specifically to calculate how much debt is held by foreigners but simply to point out that not all debt is held doimestically. Therefore, the notion that as Canadian debtors reduce debt burdens, demand can be sustained by their creditors is highly suspect.

  2. buff_butler says:

    Great post Ben. I still have to re-read Steve Keens full piece. Anyone that trashes Austrian economics is ok in my books though 😛

    I think wealth distribution would be another topic relating to this and why even if “Debt = Savings” were true in the aggrigate it wouldn’t matter.

  3. @ Jesse

    “In 2009, 77% of CMB (Canadian Mortgage Bond) buyers were Canadian. 18% were American, and a smaller 3% were European, with 2% Asian. Should CMBs begin to be issued in foreign currencies, the foreign share may experience growth.”

    Page 14

  4. Declan says:

    The basic point is that when you borrow money from a bank, that increases the money supply – you don’t borrow the money from some creditor who is now deprived of their money, the bank simply prints it (electronically of course). When you pay that money back to the bank, it doesn’t increase the balance of some creditor, it just disappears.

    So reduction of credit, either by paying loans back, or in particular via default, is a very strong deflationary force. And in a society which has a ton of debt in nominal terms, deflation is self-feeding and leads to mass destruction of the money supply (destruction of money due to default/repayment means that wages and prices have to fall, but your mortgage is still the same, so that causes more defaults and so on in a vicious circle until anyone who was leveraged is wiped out).

    And because people don’t like having their wages cut in nominal terms, it’s very hard for society to adjust to the new situation with so much less money circulating and you tend to get a lot of unemployment.

    As an aside, the notion of ‘fractional reserves’ is a bit dated. For example, Canada no longer has any reserve requirements at all. Basically it is capital requirements that constrain the lending process nowadays. Of course, the amount of capital required for a loan backed by a AAA rated sovereign is pretty close to 0, and with the AAA rated Canadian Federal Government guaranteeing so much of the increased Canadian debt recently (via CMHC, primarily), the ability of financial institutions to increase the money supply is basically unlimited, as long as greater fools keep bidding up house prices.

    I’m sure it will all end well.

  5. tw says:

    I think one of the important assertions from Keens work in his must read Cavaliers article, is that deposits do not come first necessarily, but that banks create money (credit) which then generates deposits. In other words banks have a unique role in the money creation process. This is the opposite of the prevailing view of banking.

  6. John in Ottawa says:

    I hope people noted that most of Steve’s graphs were logarithmic. Particularly those graphs demonstrating the awesome power of a credit crisis.

  7. jesse says:

    “reduction of credit, either by paying loans back, or in particular via default, is a very strong deflationary force”

    It depends on the nature of the loans being made too. If banks hold onto more reserves than before, then yes the money supply decreases and that’s deflationary. By adjusting rates, in normal times, the bank can maintain its desired reserve ratio reasonably easily. That is, as soon as a loan is repaid, the bank finds a way to make another loan. It’s what materializes from the loan that’s important: loans that are piss-poor income generators are eventually deflationary.

  8. Mango says:

    Why do you care who owns the debt? The debt is stamped with claims to your future taxable earnings.

    Again, no mention of the solid housing starts?

    • jesse says:

      Solid housing starts is a massively bearish signal. It would all but guarantee rate rises in the summer.

      • Mango says:

        If you read my last comment, 5yr cad swaps have moved over 100bps, no way that won’t have an impact at the branch teller. It will happen this week.

        However, higher rates and Kangaroo Home prices had no correlation.

      • jesse says:

        Ah the old Australian comparison. Check out their wage inflation to understand how they can handle higher rates.

        It’s not housing that concerns me, it’s Canada’s manufacturing and technology base that needs lower rates with the high CAD$.

  9. Dave... Correction says:

    Fractional reserve lending Isn’t backed by 90% of the value (USA)

    What it means is that banks can lend out X times that of their total reserves. So if US lends at 9 times reserve, for instance, you can see why the housing crisis and defaults came close to crashing their banking system.

    That’s why the banks needed ‘bailout’ from the Fed: the values lent put were massively leveraged over their reserves, and were being defaulted on.

    Like a Ponzy scheme, it works until it doesn’t. Right now we’re still in the ‘doesn’t’!

  10. pascal says:

    Please Do a post on interest rate. ITs gonna be interesting for the years to come.

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